Trump’s Tax Plan and What It Means for the Houston Housing Market

Houston High End Housing Market

The GOP recently revealed a tax plan called the “Tax Cuts and Jobs Act” that outlines proposed changes to the current U.S. tax code. The House Bill includes a plan that would impact the current mortgage interest deduction, property tax deductions and overall standard deduction limit. Currently, homeowners may deduct interest on mortgages of up to $1 million. The new GOP plan would reduce the current cap on mortgage interest deductions to mortgages of $500,000 or less and would allow a maximum property tax deduction of only $10,000.

It is hypothesized that the proposed limitations of the local property tax and mortgage interest deductions would help offset reduced tax revenues associated with a lower corporate income tax rate and reach the administration’s targeted budget resolutions. However, the GOP tax plan is thought to have disastrous impacts to local real estate markets where homes sell for one million dollars or more. Demand for high-value homes in exclusive neighborhoods in cities such as Houston, Dallas, and Austin will be lower if it means buyers will lose the benefit of a larger mortgage interest deduction and the full property tax deduction.

Tax subsidies such as the mortgage interest and property tax deductions have encouraged homeownership by granting taxpayers valuable deductions. The tax code currently allows taxpayers to itemize property taxes and mortgage interest as deductions on their taxes which lessens their overall tax bill. Unlike credits that are dollar-for-dollar savings and favor low-income taxpayers, homeownership deductions generally favor high-income taxpayers. The National Association of Home Builders has announced their opposition to the House bill based on a belief that taxpayers will be less incentivized to build and own homes. As a result of the proposed tax plan, homebuilders’ stocks have already taken a hit; Toll Brothers fell by 4.6%, Lennar is off by 2%, and KB Home by 1.4%.

According to Internal Revenue Service data, approximately 22% of all U.S. taxpayers in 2015 enjoyed a benefit from the current mortgage interest deduction. By capping the maximum deduction to mortgages worth $500,000 rather than $1 million, the GOP proposal would decrease the applicable percentage to a mere 5%. Fewer high-income taxpayers would reap the benefits of homeownership under the new tax plan.

Zillow has estimated that under the proposed changes, itemizing deductions based on the mortgage interest deduction and the property tax deduction alone would be financially worthwhile for only 2.3% of Houston homeowners. The GOP plan is most unfavorable to expensive Houston communities such as River Oaks, West University Place, Bellaire and The Memorial Villages.

Phil Silberman who is a licensed broker and real estate attorney that does a lot of work in some of the higher end neighborhoods in Houston opines on the potential effects of the GOP tax plan.

"Contrary to what many working class people believe, a lot of people living in high end neighborhoods in Houston are not rich, at least in the sense that there are a large number of people in affluent neighborhoods like West U or The Memorial Villages that do not have tons of savings and healthy personal balance sheets. These folks are often over leveraged as a result of trying to maintain an expensive lifestyle that involves servicing lots debt and overspending. Losing the full value of a $30,000 property tax deduction can be a big deal for a lot of families already living on razor thin income to expense margins. The simple math is that the increased cost of higher end home ownership will result in less demand and lower prices in the higher end markets."

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